Do you have a tax refund coming your way? Are you trying to decide how to best spend that money? If you’re considering paying down your mortgage with your tax refund, here are a few things to consider.
Compare other debts
First off, if you have other debts such as credit cards or personal loans, compare the interest rates. It’s always best to pay off debts with higher interest rates, since that will save you the most money in the long run. Usually, credit card interest rates are much higher than home loans.
Consider the tax savings
The interest paid on your home loan is usually tax deductible. That is not usually the case with credit cards, personal loans and other similar debt. Therefore, all things being equal, paying off your home loan last will give you more tax advantages.
Paying towards principal
If you decide to put money towards paying down your home loan, make sure the money sent in is applied to principal and not future monthly payments. What’s the difference? If you simply mail in a check, your lender may assume that it’s for your monthly payments, which include both interest and principal. In this case, you’re not actually paying down your mortgage but just paying “ahead of time”.
For example, if your monthly mortgage payment is $1,500 and you send in a check for $3,000, your lender might apply that to the March and April payments. This means that your next payment due is May 1st. If you’re truly trying to pay down your loan, then you should note that the $3,000 is for principal. This directly pays down your loan balance. You will still send in your regular March and April payments on schedule.
How you choose to spend your tax refund money is truly up to you. If you decide to use that refund money to pay off or pay down debt, then select the option that gives you the most savings and tax benefit. This will help you pay off debts sooner and save you money in the process.